Latest Zune Moves November 20, 2008

Microsoft made a series of moves this week around its Zune device and service, including hardware price cuts ($10 below iPods), a new firmware release with bundled games, launching a new TV campaign pumping the software, and a new pricing scheme for its subscription service. Microsoft renegotiated its label deals so that now, for the same $15 a month, subscribers can keep ten songs a month. That’s either a free album or the on-demand service for $5, depending on how you look at it. Everybody but Sony is in DRM-free MP3 format.

That’s a sweet deal, but will likely appeal primarily to the same digital music aficionado customers who’ve always had a spot in their hearts for subscription services. Those high-spending, digitally active music fans represent about 15% of the US online adult and teen population — around 26 million adults and 3 million teens. About 2-3 million people subscribe currently.

I asked Microsoft if it considered just cutting the price of the service, and execs said, sure, but that wouldn’t get over the “rental” hump. I also wondered if the model can be profitable. On-demand music subscriptions can be, if customer acquisition costs are managed, but 99-cent singles are only barely profitable at scale. Microsoft answered that the music biz is all about scraping out a few points of margin from multiple revenue streams. Okay, but subscriptions, niche though they are, are one of the few places where there might be a decent margin for the service and the rights holder. And Microsoft still hasn’t done much about advertising revenues.

Microsoft’s TV campaign features artists like Common, Afrika Bambaataa, and Kings of Leon and is focused on national cable with a few primetime network spots. Its theme is turning your PC into a music discovery machine, and is a move towards Microsoft’s new positioning around “Zune-powered experiences” across multiple “tuners.” That is, not just MP3 players, but PCs, phones, Xbox, etc.